March 2005

Sale of a "Going Concern" Business

Is the purchaser registered for GST

A recent decision from the Court of Appeal has highlighted the need for clarity when drafting agreements for sale and purchase of a business where the parties consider the business to be a “going concern”.

The legislation provides that if it is a sale of a “going concern” business from a GST registered vendor to a GST registered purchaser then the GST rate drops from 12.5% to 0%.

In the above case the purchaser warranted that it was GST registered but in fact was not. The agreement stated the price as “including GST (if any)”. The vendor settled on the basis that the GST was $0.00. Subsequently, as the purchaser was not GST registered the vendor was required by IRD to pay the 12.5% GST. The vendor sued the purchaser. The Court held that the price provision and the warranty provision have to be read together. The purchaser was ordered to pay damages equivalent to the amount of GST that the vendor had to pay.

Our advice:

• Make the purchase price “plus GST (if any)”;
• Have a special term in the agreement acknowledging that it is a sale of a “going concern” and that both parties are GST registered;
• Check before settlement that the purchaser is, in fact, GST registered.